The main objective of this particular aspect of financial management is to highlight the issues of dividend policy and critically evaluate why some experts feel that dividend policy matters. Dividend theory discusses the bird-in-the-hand argument for paying current dividends, it explains and identifies the logic of the dividend irrelevance and identifies the market imperfections that make dividend policy relevant.
Dividend decision of the firm is a crucial area of financial management. The important aspect of dividend policy is to determine the amount of earnings to be distributed to shareholders and the amount to be retained in the firm retained earnings are the most significant internal sources of financing the growth of the firm. On the other hand, dividends may be considered desirable from shareholder’s point of view as they tend to increase their current return. Dividends, however, constitute the use of the firm’s funds. In theory, the objective of a dividend policy should be to maximise a shareholder’s return so that the value of this investment is maximised. Dividend policy is irrelevant where r=k when all other assumptions are held valid. But when the simplifying assumptions are modified to conform more closely to reality, dividend policy does affect the value of a share even when = k this view is based on the assumption that under conditions of uncertainty, investors tend to discount distant dividends (capital gains) at a higher rate than they discount near dividends. Investors, behaving rationally are risk-averse and, therefore, have a preference for near dividends to future dividends the logic underlying the dividend effect on the share value can be described as the bird-in-the-hand-argument.
Some of its main topics are:
Dividend cost and relevance
Dividends policy and uncertainty
Shares-advantages and buybacks
. Stability of dividends
. Tax differential and information asymmetry
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